[BreachExchange] Trade Secret Misappropriation By Ex-Employees In China: How To Confront “Inside Theft”

[Audrey McNeil]

http://www.jdsupra.com/legalnews/trade-secret-misappropriation-by-ex-82037/

Article 123 of the General Provisions of the Civil Law of the People’s
Republic of China (effective Oct. 1, 2017) confirmed that trade secrets are
intellectual property, signifying China’s recognition of the importance of
trade secret protection.  Nevertheless, trade secret misappropriation
remains rampant in the country.

Article 10 of the Anti-Unfair Competition Law of China provides that trade
secret misappropriation occurs when:

- a party acquires an owner’s trade secret by improper means such as theft,
economic inducement, or coercion;
- a party discloses, uses, or allows other parties to use the trade secret
acquired by such improper means;
- a party discloses, uses, or allows other parties to use the trade secret
in violation of an agreement with, or requirement by, the owner to protect
the trade secret; or
- a third party acquires, uses, or discloses another party’s trade secret
with the actual or presumed knowledge of the above-mentioned illegal acts.

Article 10 provides three requirements for trade secret status:  (a) it is
unavailable to the public; (b) it creates economic benefits for its owner
and is of practical utility; and (c) it is subject to reasonable measures
taken by its owner to maintain its secrecy.  Article 13 of the
Interpretation of the Supreme People’s Court on Issues Concerning the
Application of Law in the Trial of Civil Cases Involving Unfair Competition
provides that customer lists are protectable trade secrets because they
contain client information that is unavailable to the public, including
business habits, intent and transaction history.

At the beginning of this year, two Chinese enterprises initiated legal
action against their former employees for trade secret misappropriation.
In January 2017, Huawei announced that six of its former engineers and
designers from its end-user business unit were investigated by the public
security bureau for alleged trade secret misappropriation.  In May 2017,
the public security bureau arrested a former quality control technician of
Lao Gan Ma, a producer of Black Bean Chili Sauce.  The bureau found that
the technician misappropriated more than RMB 10,000,000 worth of trade
secrets concerning the production process and raw material ratio of the
sauce when he defected to another food factory which started producing an
identical product.

There are many other trade secret misappropriation cases in China.
However, the overall success rate by trade secret owners is still low due
in large part to the difficulty of collecting supporting evidence.  It is
therefore prudent for businesses to implement preventative measures.
Examples include instituting varied security measures for different
categories of information depending on their value and significance;
entering into nondisclosure and noncompete agreements with employees;
training employees on their duty of confidentiality; conducting
comprehensive exit interviews of key employees upon their departure; and
encrypting employees’ electronic devices and recovering them as needed.
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